The chairman’s letter in the annual report, signed 6 March 2012, is clear. “The board set three priorities for BP,” wrote Carl-Henric Svanberg. “Safety must be enhanced and embedded. Trust must be regained. Value must be created through a clear strategic plan”

Safety, now a factor in the executive bonus plan, is tangible evidence of the company’s strategic priorities of reinforcing safety and risk management, rebuilding trust and reinforcing value creation of its intangibles. At group level, the safety and risk management component includes targets for recordable injury frequency, loss of primary containment and implementation of change programmes. Rebuilding trust is focused on external reputation as measured by external surveys and internal morale as measured by surveys.

BP’s board considers reputation from two perspectives – the reputational risks to the group and the processes the company has in place to manage these risks. In 2011, the board reviewed external reputation data which looked at BP’s reputation in the UK and US. It also discussed the group’s communications strategy and its reputation management plan.

To assure that stakeholders know that BP is serious about reputation and its risk management, the annual report offers up the term 20 times in the 10k section 1A-Risks. The term also appears liberally throughout the balance of the document for a total of 45 mentions over twenty different pages in the 300 page document.

In what appears to be a growing trend first announced formally at UBS, but clearly preceded by BP, both reputation measurement and reputational risk are major issues at the Board level. This is why: as reported here earlier, firms that have superior reputations newly discovered can pickup an average of 6% of market cap, while firms that experience a reputational crisis can lose an average of 7%. Anything that can precipitate a 13% swing in value is bound to get the attention of a corproate board.

The Steel City Re reputation metrics for BP this week show the following trends: BP’s reputational value metric, a non-financial indicator of reputational value, is stabilizing with a near median volatility relative to its peers, and a long term forecast of stability. The company’s corporate reputation ranking, an indicator of relative standing, places the firm in the 81st percentile. Since the volatility indicators are neutral, the data do not yet indicate a near term boost in equity returns above the median for the peer group. After years of reputational volatility, it appears at this point that equity investors are waiting for further evidence of material risk reduction in RepRisk -- reputation risk. Nevertheless, considering where things were two years ago, BP has come "a long way baby."

In introductory remarks for the release of the 2012 Edelman Trust Barometer results, Richard Edelman provided background for the pan-institutional deterioration of trust. “In 2008-2009, in the wake of a recession that saw large, global companies such as Lehman Brothers and AIG collapse, trust in business imploded. Government stepped in with bailouts and new regulations. But in 2011, government became paralyzed by the politics of extremism and endless haggling – and the public lost confidence.”

Gideon Rachman, writing for the Financial Times, calls it the age of indignation. “This was a year of global indignation, from the Occupy Wall Street movement to the Moscow election protests and China’s village revolts. It was popular protests on either side of the Mediterranean – in Tahrir Square in Cairo and Syntagma Square in Athens – that set the tone for 2011.” Social networks linked by social media are now the sources of trust and media of choice.

Ever alert, the Willy Suttons of the world are  working these trusted environments. This week’s Economist () introduces the notion of ‘affinity fraud.’ “The term refers to scams in which the perpetrator uses personal contacts to swindle a specific group, such as a church congregation, a rotary club, a professional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters.’ Here’s the rub. According to the Economist, “Mistrust of mainstream finance helps the scammers. The big guys on Wall Street have shown they can’t be trusted, they say; better to go with someone you know.”

Out of the pan and into the fire?

“Reputation resilience is the benefit arising from having a company pre-position stores of goodwill on which it can draw when the headline crisis strikes,” the Mission Intangible blog of the Intangible Asset Society asserted in June of last year. “It means stakeholders will tend to feel a company’s pain and empathize rather than holding a company culpable.”

The S&P500 index  lost nearly 10% of its value in November. There is fear in the markets as evidenced by the rise in the CBOE VIX. The result is a broad-based run on corporate goodwill. Therefore, today, those stores of goodwill are needed more than ever to conserve enterprise value. To build and protect stores of goodwill, corporate boards need to understand what intangible assets underpin their company’s reputation. They need to oversee the management of the reputation of their firms.

But before boards can oversee reputation management, and before executives can manage reputation, they need to measure it. This is how. The benefits of reputation are embedded in the value and costs associated with operating a business. These values can be extracted, inexactly but usefully using the same tools financial analysts estimate value – essentially, the unexplained excess or deficit in an appropriately structured multivariate regression holding all other comparable elements constant.

If DIY is not on the table, there are an increasing number of consultancies providing access to third party data and offering integrated solutions that fall under the general heading of quantitative reputation management. The data shared weekly in the blog branded as the Steel City Re® Corporate Reputation Index metrics, are exemplary of the  range of reputation management tools now emerging.

With so much value tied today to corporate reputation, few other managerial investments can create, protect or restore an equivalent amount of value.

Philosopher Robert Nozick emphasized that the coordination of behavior and cooperation to mutual benefit is something that ought to be very congenial to people in the libertarian tradition. Further to our Mission:Intangible Monthly Briefing last week, it would be hard to locate a person of any tradition who would not have found congenial the conversation on identifying, characterizing and communicating risk.

Spearheading the conversation were Baruch Fischhoff, Ph.D., the Howard Heinz University Professor in the departments of Social and Decision Sciences and of Engineering and Public Policy at Carnegie Mellon University; and Scott Rose, an executive from Inkling Markets, a firm that manages risk through decision markets. Following a program that was expertly moderated by Jonathan Salem Baskin, global brand strategist, speaker, and author, the speakers graciously provided the following links for those wishing to learn more.

1. Sherman Kent on communicating risk within the intelligence community. Read more.
2. Intelligence Analysis for Tomorrow (Consensus Report). Read more.
3. Intelligence Analysis: Behavioral and Social Scientific Foundations (Collection of Readings). Read more.
4. Decision Markets: Research by Miter, Inc. Read more.

There is no cost to registering and listening to a program; archived programs are sold as podcasts. Members of the Society receive fabulous discounts on the podcasts. Click here to see our library. Click here to join the Society.

In Douglas Adams’ The Hitchhiker's Guide to the Galaxy, “the only thing that went through the mind of the bowl of petunias as it fell was 'Oh no, not again.' Many people have speculated that if we knew exactly why the bowl of petunias had thought that we would know a lot more about the nature of the Universe than we do now.”



We can reasonably assume that similar thoughts raced through the minds of BP (NYSE:BP) executives on 20 April as the Deepwater Horizon drilling rig exploded, caught fire, and sank. And while we are probably equally clueless about the nature of the Company, as are stakeholders who own its reputation, of this we can be certain: it is sinking.

As illustrated in the series of Steel City Re Corporate Reputation Index charts below, BP and the other firms associated with this safety and environmental disaster are experiencing an acceleration of a steady reputational decline. And as noted in the book, Mission Intangible and more recently in an article in CFO magazine, these declines are indications and warnings of an increased risk of a reputational event.

Not that BP is unaware. The New York Times quotes BP CEO Tony Hayward on Friday as saying, “Reputationally, and in every other way, we will be judged by the quality, intensity, speed and efficacy of our response.”

BP has blamed the rig’s owner and operator, Transocean (NYSE:RIG), for the accident. Further investigation is now suggesting that a drilling subcontractor, Halliburton (NYSE:HAL), may have failed to execute a critical task that prevents gas and oil from escaping from the well.

The process is called ‘cementing’ and it is challenging. A 2007 study by the U.S. Minerals Management Service found that cementing was the single most-important factor in 18 of 39 well blowouts in the Gulf of Mexico over a 14-year period. More recently, Halliburton (NYSE:HAL) has been accused of performing a poor cement job in the case of a major blowout in the Timor Sea off Australia last August. An investigation is under way.

As a case study of risk and reputation management, this has almost all the main elements. Consider the following:

1. Iconic brand, BP, working through subcontractors - a key source of risk (we explore this topic further this Friday, see below)
2. History of failures in managing the processes of assuring safety - a reputation lacking resilience 
3. Marketing campaign built around sustainability laid to waste by a massive oil spill - lack of authenticity

The LA Times notes in a story on 1 May that experts were cautious about attributing blame, pending what are expected to be lengthy investigations by Congress and the Department of Homeland Security, which oversees the Coast Guard.

Satisfy your intellectual curiosity!

If the above issues pique your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May at 12h00 EDT. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

Next Friday, May 7, the Society's monthly Mission Intangible Monthly Briefing will feature Scott Childers from the Walt Disney Company (NYSE:DIS) who is calling for holistic supply chain vendor management, and Bob Rittereiser from Zhi Verden whose Global Trademaster™ product provides total supply chain visibility. A note this past Monday in the Wall Street Journal explains why this is so important.

On Monday U.S. Federal, state and local law enforcement officials, part of the National Intellectual Property Rights Coordination Center said they made their biggest-ever seizures of counterfeit goods this month in two operations that netted more than $240 million in a sweep of more than 30 U.S. cities. Immigration and Customs Enforcement announced the double-barreled operation on Monday to coincide with World Intellectual Property Day.

Commemorating a day to heighten awareness of intellectual property with arrests may not be festive, but it is appropriate. Fake goods do more than rob intellectual property owners of revenue. Fake goods raise the specter of a full range of reputation-linked issues that go beyond cash flow to create risk in areas as  diverse as ethics (international labor standards), quality, safety, security, and sustainability. The article further notes that next week, the Naval Criminal Investigative Service and the Defense Criminal Investigative Service will begin targeting counterfeit goods that could get into the military supply chain. The U.S. General Services Administration will target fake goods in the federal civilian supply chain.

To target effectively, one needs intelligence. According to Mr. Rittereiser, Zhi Verden’s Global Trademaster™ provides that intelligence; according to Mr. Childers, having that intelligence is a necessary component for world class supply chain management.

Act on your intellectual curiosity!

If the above issues pique your interest, here are several things you can do right now:

1. Register free of charge for the next IAFS Mission Intangible Monthly Briefing set for Friday 7 May at 12h00 EDT. The conversation will feature Scott Childers from Walt Disney and Bob Rittereiser from Zhi Verden on “Process-driven reputation risk in supply chains”
2. Purchase the book, Mission: Intangible. Managing risk and reputation to create enterprise value, at the IAFS Store (or any online book retailer) 
3. Become a member of the Intangible Asset Finance Society.
4. Join our community on Linked-In.

The Intangible Asset Finance Society is absorbed with issues at the interface of finance, risk, and the six major business processes that drive reputation: ethics, innovation, quality, safety, sustainability, and security. Today's note, courtesy of Society member Bruce Berman, CEO of Brody Berman Associates, Inc., a specialized management consulting and communications firm, is exemplary of core Society interests. Bruce writes,

In a story that received surprisingly scant media coverage, an appeals court has decided that two insurance companies must provide defense coverage to Hyundai against patent infringement claims by a non-practicing entity (NPE), also known as a patent troll, because the company’s policy covers advertising injury. As reported by the Courthouse News Service and IP Law 360 on April 7, the federal appeals court reversed a lower court decision when it ruled that Hyundai Motor America (SEO:011760) is entitled to defense coverage by National Union Fire Insurance Co. of Pittsburgh, Pa.,  a unit of AIG.

The case involved a patent infringement suit over an advertising method that ended with a $34 million verdict against the automaker. The U.S. Court of Appeals for the Ninth Circuit ruled Monday that Judge James Selna of the U.S. District Court for the Central District of California erred when he granted summary judgment to National Union and American Home Assurance Co. on the grounds that patent infringement does not constitute “advertising injury” for the purposes of an insurance policy.

As reported in IPL360 “ Gene Schaerr, a partner at Winston & Strawn LLP who represented Hyundai, called the ruling a ‘tremendous victory.’ Schaerr stated that the ruling is significant not only for Hyundai, but for a large number of other companies with similar policies that cover advertising injury. "The insurance industry has been taking the position that such policies don’t apply to patent infringement and other alleged wrongs involving Web sites,” he noted. The case began in 2005, when Hyundai was one of 20 automakers sued by patent-holding company Orion IP LLC, now known as Clear with Computers LLC, in the Eastern District of Texas over a patent for a method of generating customized product proposals.

Bruce adds, "I wonder how many companies are aware that some of their existing insurance coverages may fund IP defense if not liability?"

Can shareholders rely on corporate boards to protect their interests? By Delaware law, certainly. The Duty of Care holds Directors responsible for oversight, and personally liable in the absence of oversight when it should have been there. Ask Society IA Corporate Governance Committee Chair Cathy Reese, an authority on board civil liabilities.

But guns and badges? Apparently, according to Advisen Front Page News,  which quotes last week Lynn Turner, a former chief accountant of the Securities and Exchange Commission who's criticized the failure of ratings agencies to see the risks in the failed Houston energy giant Enron Corp., which collapsed in late 2001. "I personally think until law enforcement agencies start holding these boards accountable, the point you're raising is probably right on target, and you're probably not going to get a lot of change."

Since the quote was in the context of an article on Moody’s Corporation (NYSE:MCO) and allegations of inadequate board oversight and risk management, we look at Moody’s reputation as captured by the Steel City Re Corporate Reputation Index.



The graph shows volatility, for sure, but over the course of the year among its 23 peers in the Diversified Financial Services sector, Moody’s reputation index climbed slightly from the 65th percentile to the 72nd percentile. There was a brief depression in September when Moody’s provided a somber earnings guidance, but both its reputation and economic returns bounced back to their mean trend for the year by year’s end. Moody’s ROE finished only 0.25% below the median of its peers and approximately equal to the period’s return for the S&P500.

Where does that leave us with respect to the value of the intangible asset of effective corporate governance? While sympathetic to the concept that criminal risk may foster compliance better than civil risk, we are still of the opinion that there is value to be discovered simply through superior governance as it manifests in ethics, quality, innovation, safety, sustainability and security. A riff on that concept is the subject of our Mission Intangible Monthly Briefing this Friday, 9 April, featuring Society Committee Chairs Paul Liebman from Dell, Inc. and Jon Low from Predictiv.

Although we intimated recently that new SEC regulations effective 28 February would drive risk and reputation management into the boardroom, we hardly expected 140 year-old Goldman Sachs (NYSE:GS) would be first at the wheel. Nevertheless, reading through this venerable investment bank's latest 10-K filing the next day, there it was--the first formal disclosure of headline risk.

We may be adversely affected by increased governmental and regulatory scrutiny or negative publicity. ...
The financial crisis and the current political and public sentiment regarding financial institutions has resulted in a significant amount of adverse press coverage, as well as adverse statements or charges by regulators or elected officials. Press coverage and other public statements that assert some form of wrongdoing, regardless of the factual basis for the assertions being made, often results in some type of investigation by regulators, legislators and law enforcement officials or in lawsuits. Responding to these investigations and lawsuits, regardless of the ultimate outcome of the proceeding, is time consuming and expensive and can divert the time and effort of our senior management from our business ... Adverse publicity, governmental scrutiny and legal and enforcement proceedings can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations.

Translating the above into lingua IAFS, Goldman Sachs is saying that their financial performance will be impacted adversely if their reputation is tarnished. They may lose pricing power, may have higher operating costs, may have higher credit costs, and may reward shareholders with lower equity returns.

As the Wall Street Journal reported the next day, March 2, this is the first known 10-K disclosure of "PR" risk. But it is hardly the first acknowledgement of reputation risk. For example, with respect to ‘PR risk,’ both German financial regulators and a 160 year-old Pittsburgh-based food company with a German-American heritage are well ahead of Goldman.

Last summer, the German financial regulator BaFin formally noted that reputation risk is a trigger of liquidity risk. Years earlier, the H.J. Heinz Company (NYSE:HNZ) created the first office of Risk and Reputation Management under the leadership of James Trout. Cutting to the chase, risk and reputation management is the new new thing. This Society is committed to ongoing thought leadership. Won't you join us?

And now, a tribute: Thank you, Dan Reynolds!

Join Us

If the above intrigues you, frightens you, or challenges you to learn more, look no further. The Intangible Asset Finance Society wants to be your business resource. Join us and be part of an organization that provides a wealth of educational materials, including a new book, to further your executive career, and exciting monthly conferences such as the upcoming one on innovation.

Innovation: Hot Policy and Practice Issues

Be sure  to register for a complimentary seat at the 5 March Mission:Intangible Monthly Briefing, held by phone at 12h00, EST. It's an innovation smack down. Athena Alliance President and intangible asset policy expert Kenan Jarboe goes head to head with Steel City Re's Judith Giordan, Managing Director of IA Finance and former senior technology executive with Pepsi, Henkel, International Flavors & Fragrances, and Polaroid. Yes, as always, registration is complimentary and slides are already posted on the website events page.

The IAFS launched its 2010 membership drive this past week. This is why. On February 28, new US SEC regulations will drive into the boardrooms risk, reputation and intangible asset management. 

You have a decision. Will you be at the table or on the menu?

These regs mean that every board member, in fact every top executive, can expect major new challenges. Members of the Intangible Asset Finance Society (IAFS) will be prepared. Here’s how:

1. Thought Leadership. The IAFS is the only interdisciplinary Society of professionals committed to the financial exploitation of intangible assets. That translates into enhanced pricing power; lower operating and credit costs; and higher net incomes and earnings multiples.

2. Risk Management. A lost reputation can destroy a firm overnight. IAFS can keep you up to date with risk management strategies for ethics, innovation, quality, safety, environmental sustainability, and security.

3. Preferential Pricing. Society members receive preferential rates for IAFS products at our new store and discounted registration to various professional meetings. Discounted registrations for the March ICAP Ocean Tomo meeting in San Francisco and the June IP Business Congress in Munich, for example, are now offered.

4. Incentive Premium. Sign on for your academic or corporate membership including payment by March 15 and receive a complementary copy of the IAFS’s latest book, Mission: Intangible. Managing risk and reputation to create enterprise value (a $29.95 value).

Click here to learn how our strengths in Thought Leaders and Risk Management, financial benefits such preferential pricing, and premiums such as the book shown at right make joining the Society today an offer you can't refuse.